Intel Rises on Return to Profitability

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Intel (NASDAQ:INTC) shares gained about 7% on Friday after the legacy chipmaker reported second-quarter results that were ahead of market expectations. Investors were also pleased about the offered outlook, as well as the fact that Intel’s CEO reaffirmed that the company remains on track to meet its targets aimed at regaining manufacturing leadership by 2025.

There were a lot of positives in Intel’s Q2 earnings report. After two consecutive quarters of losses, Intel reported a surprising profit of 13 cents per share in the second quarter, much better than the expected loss of 3 cents per share. Although revenue fell 15% year-over-year to $12.9 billion, it still came ahead of the consensus of $12.13 billion.

“Our Q2 results exceeded the high end of our guidance as we continue to execute on our strategic priorities, including building momentum with our foundry business and delivering on our product and process roadmaps,” said Pat Gelsinger, Intel CEO.

Several Positives From Q2 Report

Intel’s largest business segment by revenue – Client Computing – generated as much as $6.78 billion, topping the consensus for $6.1 billion. The second largest sector and the one that Intel wants to expand substantially – Datacenter & AI – also beat expectations by attracting $4 billion in sales.

Strong performance in these two sectors offset weakness in the Network and Edge business segment, which generated $1.36 billion in revenue and missed analyst targets by over $200 million.

Another sector that CEO Pat Gelsinger wants to see rising as quickly as possible – Intel Foundry Services – attracted $232 million in Q2 sales, while the market was looking at just $152 million.

Investors were also pleased to find out that Intel’s adjusted gross margin came in at 39.8%, topping the market consensus by 260 basis points. While analysts were expecting Intel to report its adjusted operating margin was negative at 1.6%, Intel reported +3.5%.

Following Q2 outperformance, Intel followed up and offered a third-quarter forecast that also came in ahead of market expectations. Intel guided to Q3 sales of $12.9-13.9 billion, with the midpoint of this range coming in better than the expectations of $13.28 billion.

On the bottom line, Intel sees adjusted profit per share of 20 cents, again easily ahead of the average analyst estimate of 13 cents. The adjusted gross margin is seen further expanding to 43%, while the market was looking for an expansion to 40.9%.

Commenting on the Q2 performance, Intel’s CFO David Zinsner said the company showed strong execution and has made further progress towards the $3 billion target in cost savings in 2023.

“We remain focused on operational efficiencies and our Smart Capital strategy to support sustainable growth and financial discipline as we improve our margins and cash generation and drive shareholder value,” he said in a press release.

A Key Sign That New Strategy is Working

Investors wanted a continued financial improvement and stronger execution by Gelsinger & Co and they likely got what they were looking for, hence a jump in shares in after-hours trading Thursday. On the earnings call, CEO Gelsinger spoke about “rebuilding customer confidence in Intel,” after years of underperformance and delays in the launching of new products.

“We remain committed to delivering on our strategic road map, achieving our long-term goals and maximizing shareholder value,” he said on the call.

Back in May, Nvidia CEO Jensen Huang hinted that he is “open to manufacturing with Intel.” He also said that Nvidia received the test chip results from Intel “and the results look good.” Back in March, Huang said:

“We’ve diversified the number of foundries, and Intel is an excellent partner of ours[…] They’re interested in us using their foundries, and we’re very interested in exploring it.”

Though it is unknown if potential AI restrictions will dampen Nvidia’s plans and prospects for future growth.

Rebuilding customer confidence is absolutely crucial for Intel’s turnaround story to succeed. In 2021, just two months after Gelsinger took over, the chipmaker announced the “IDM 2.0” strategy.

Under the new plan, Intel said it will commit about $20 billion to build two new facilities in Arizona. Gelsinger’s special focus is on making Intel become a major provider of foundry capacity in the U.S. and Europe to serve customers globally. The goal is to return Intel to the top of the innovation and product leadership pyramid.

In addition to these goals, the faster-than-expected rollout of generative AI technology (GenAI) has prompted Intel to also start focusing more on high-end AI chips, an area completely dominated by Nvidia, and AMD to some extent.

“We are also well-positioned to capitalize on the significant growth across the AI continuum by championing an open ecosystem and silicon solutions that optimize performance, cost and security to democratize AI from cloud to enterprise, edge and client,” Gelsinger added in the Q2 earnings remarks.

He added on the call that Intel is now seeing the first “real benefits from our accelerating AI opportunity.” Gelsinger believes that Intel Foundry Services (IFS) is positioning the company to capitalize on the massive AI opportunity.

“It all starts with our process and product road maps, and I am pleased to report that all our programs are on or ahead of schedule,” he added.
The fact that the Datacenter/AI business segment contributed to the Q2 sales beat shows that Gelsinger is on the right track to orchestrate a major comeback of a fallen chip giant. The outlook also shows indications that the gradual road to recovery within the client computing segment is on the way.

Summary

Intel reported better-than-expected profit, revenue, and margin figures for its second quarter, while also offering a stronger-than-expected outlook for this quarter. As a result, Intel shares rose on Friday as investors gain more confidence in CEO Gelsinger’s turnaround strategy.

Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.